More foreign companies quitting India is bad news for ‘Make in India’

A series of bad news has hit India’s ‘Make in India’ plans last week. First the American automaker Ford announced on May 12, that it was abandoning its plan to make electric vehicles (EVs) in India for exports, withdrew from the productivity-lined incentive (PLI) scheme it had applied for (and received approval) and revived its plan to relocate its existing manufacturing facilities out of India. This is because of its mounting losses and slowdown in the passenger vehicle (PV) market after the pandemic hit.

Then, on May 13, another American automaker Tesla declared that it had put its plans to sell EVs in India on hold, having failed to get lower import taxes. Tesla’s decision comes after year-long talks with India. Tesla first wanted to test the demand for EVs in India by selling its vehicles manufactured in the U.S. and China and for which it was seeking lower tariff, India wanted it to first manufacture EVs here before it would offer lower tariff.

While Tesla’s decision amounts to a potential loss of business and employment, Ford’s quitting would mean a net loss of 4,000 jobs at its two manufacturing units in Tamil Nadu and Gujarat and loss of investments by its dealers who have also generated jobs. Ford had been operating in India since 1990s.

Ford is the fifth major multinational automaker to quit India since 2017, after General Motors, Man Trucks, Harley Davidson and United Motors. According to the Federation of Automobile Dealers Association (FADA), the implication of these five quitting means a total loss of 64,000 jobs and dealer investments of ₹2,485 crore.

A similar grim picture is evident from the annual reports of the Ministry of Corporate Affairs (MCA). A plain reading of its annual reports shows a decline in (i) the growth of registered foreign companies (ii) new registration of foreign companies and (iii) “active” foreign companies during FY14-FY21.

From a high of 3.9% in FY16, the growth of registered foreign companies has fallen to 1.5% in FY21; new registrations have fallen from a high of 216 in FY14 to 63 in FY21 and “active” companies have fallen from 80% in FY14 to 66% in FY21.

Manufacturing shifting out of China but not to India

In addition to lowering of activities of foreign companies, there is yet another concern.

India has been talking about turning itself into a global manufacturing hub for which it had launched the mission mode ‘Make in India’ programme in 2014 with great fanfare. To realise this, India should have tried to persuade manufacturing companies shift their bases from China in recent years, for economic and political reasons, to come to India. It said it was doing so but its lack of sincerity of efforts is telling.

Parliamentary Standing Committee report of 2021, “Attracting investment in post-Covid Economy: Challenges and Opportunities for India”, made a revealing observation while talking about foreign companies shifting out of China. It said: “However, it is learnt through media reports that most of these companies shifted their base to Vietnam, Taiwan, Thailand, etc. and only a few came to India.”

Notice the expression “however, it is learnt through media reports”.

Why should the parliamentary committee learn through media? Why doesn’t the Indian government provide this data to the committee? The answers are clear. The government doesn’t have such data, meaning it isn’t even tracking. Else, it would have explained the efforts it made and the challenges it faced.

For the government’s benefit, the report listed the challenges both foreign and domestic investors face in India: “administrative and regulatory hurdles, inadequate and costly credit facility, tedious land acquisition procedure, inadequate infrastructure facilities, high logistics cost and large unorganised manufacturing sector, among others”.

Failures of ‘Make in India’

That ‘Make in India’ has failed to improve manufacturing is obvious.

India had launched this programme to raise the share of manufacturing to 25% of GDP. A look at the official statistics, however, suggests that has not happened. As percentage of gross value added (GVA), the share of manufacturing fell from a high of 18.4% in FY18 to 17.8% in FY21. In FY22 (AE2), it is expected to go up to 18.2% – which is well below the 25% level.

The growth in manufacturing IIP remains well below the GDP growth too, further reducing the possibility.

During the last decade of FY13 to FY22, the annual average manufacturing IIP growth is 2.9% – nearly half of the GDP growth rate of 5.5% (2011-12 GDP series). As against this, in the previous seven years of FY06 to FY12 under the 2004-05 series, the manufacturing IIP grew at an average of 9% – a marked decline during FY13-FY22.

The capacity utilisation (CU) in manufacturing, which reflects idle capacity in the economy, shows the quarterly average between FY15 and FY22 (up to Q3) is 70.9% – that is, idle capacity of 29%. This is a fall from 80% or more capacity utilisation in FY10-FY11.

Both these datasets show that manufacturing is yet to pick up the growth levels of the UPA.

All’s not well with the economy

Why foreign automobile companies are leaving India is clear. The pre-pandemic slowdown and the pandemic crisis have hit the demand for automobiles.

The FADA data shows, retail sale of all segments of vehicles showing a marked declining trend in FY22 vis-à-vis FY20 (pre-pandemic). For better perspective, it should be kept in mind that the GDP growth was 3.7% in FY20, -6.6% in FY21 and 8.9% in FY22 (AE2).

The two-wheeler segment saw a decline of 29% and the three-wheelers a decline of 46%. This shows the lower half of the economic pyramid has been hit badly by the pandemic. Passenger vehicles (PV) were down by 1.7% – reflecting that even the better off segment is impacted. The sale of commercial vehicles (CV) was also down by 26% – indicating that the economic activities are yet to gather momentum. The only segment that saw improvement is tractor sale; it went up by 14.5%. The overall retail sale of automobiles declined by 24.8% in FY22 over FY20.

When the sale of number of units are considered, the two-wheeler trend shows FY22, when 11.9 million units were sold, remained below the FY15 level when 13.4 million units had been sold. Taking population growth during FY15-FY22 into considering, the fall is bigger than what the data reveals. Similarly, in the case of PVs, the number of units sold in FY22 was less than in FY17; that of CVs in FY22 less than in FY16.

The above three reflect that the pre-pandemic slowdown and the pandemic crisis have stifled the growth of automobiles and hence the foreign automakers’ decisions to quit India.

The GDP numbers, however, point to something else.

With the GDP growth of FY22 (AE2) at 8.9%, India is back to being the fastest growing major economy. It translates into 1.8% growth over FY20, suggesting that the GDP has reached the pre-pandemic level. But this headline number hides the pain apparent in the economy as the earlier datasets (activities of foreign companies, IIP, CU, automobile sales) reveal.

Instead of celebrating 8.9% growth, India needs to review its manufacturing policy and ‘Make in India’ programme to ensure that more foreign companies are attracted to India to set up manufacturing activities, rather than flee.